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Last Updated : Dec 28, 2011 03:12 PM IST | Source: CNBC-TV18

Income fund returns to stay at 9-11% range in 2012: Experts

While 2011 enters the last lap, experts Dhawal Dalal, Senior Vice President, Head - Fixed Income at DSP BlackRock Mutual Fund and Chaitanya Pande, Head-Fixed Income at ICICI Prudential MF share an overview of the year that was and all that is expected at the fund market in the upcoming one.


While 2011 enters the last lap, experts Dhawal Dalal, Senior Vice President, Head - Fixed Income at DSP BlackRock Mutual Fund and Chaitanya Pande, Head-Fixed Income at ICICI Prudential MF share an overview of the year that was and all that is expected at the fund market in the upcoming one.


"Investors made an average of 9% on debt funds in 2011. Going into 2012, although the equity market is still unpredictable, income fund returns should remain in 9% to 11% range," said Dalal. He also said that the expectations on RBI to ease liquidity in banking and the prospects of series of rate cuts will keep the bonds buoyant for at least the first half of 2012.


Further sharing his outlook on fixed income products, Pande suggested that if investors are coming in for a long duration, it should have at least 18 months to 2 years horizon to revive the present volatility. "The medium end of the short term funds are doing better than long duration fund," he reiterated.


Below is an edited transcript of the discussion on CNBC-TV18. Also watch the accompanying video.


Q: Give us a comparison of what the returns have looked like with respect to debt funds, if someone had invested at the start of the year?


Dalal: I think the returns are coming closer to around 9%, whether you look at the liquid funds or good quality dynamic bond funds. Returns are somewhere closer between 8.5% and 9.25%. Investors have made around 9% on an average in 2011, so far.


Q: A 9% return on a debt fund, fixed income fund is a stark divergence from the 20% losses that you have seen in equity markets. Do you expect to see the same kind of divergence play out in 2012? Will an investment in debt funds yield better returns in the year to come?


Dalal: It is very difficult to predict how the equity market is likely to behave in 2012 but we can only say that the income fund returns should remain in 9% to 11% range going into 2012, as the market participants are expecting, the RBI to ease liquidity in the banking system. Also, there is a prospects of series of rate cuts t6hat should keep the bonds buoyant, at least in the first half of 2012.


Q: How have flows been into some of the fixed income products?


Pande: We have been seen a lot of freeze in our short term funds. There is a one to three years space, which is not too a duration for funds. Although the long duration funds have done well for the last couple of months but volatility would remain quite significant in the long duration fund. Hence, we are telling investors that if you come in long duration you should have at least an 18-months to a 2-year horizon to revive the volatility.


The deficit numbers are not looking good for next year either, so that could keep the strain on supply side on the long end. The medium end of the short term funds are doing better than long duration fund, hence, that is the kind of call we are telling investors to take.


Q: If you had to split it between the shorter duration and the longer duration ones, how would you work out a fixed income portfolio now?


Pande: I would say 40-60% would be in short-term plans or regular saving plan, which on a one to three year space is likely to outperform over the next 12-18 months. One could also look at either FMPs (fixed maturity plans) for 18 or 15 months.


Q: Not too many people are aware about the various fixed income products that you have in the market, if you had to split it up between short-term debt funds, medium-term funds what should the allocation look like?


Dalal: Investors will be better off investing in strategic bond funds, kind of dynamic bond funds. We believe that 2012 is going to be the year when RBI is going to ease on liquidity and the yield curve because of that it is likely to turn steeper, which means short-term rates are likely to fall more than the long-term rates.


We believe that assets maturing within one to two years are likely to benefit significantly because of the ease of liquidity and RBI

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First Published on Dec 28, 2011 11:34 am